Delhi District Court
M/S Mubarak Overseas Private Limited vs Union Of India & Others on 28 September, 2022
IN THE COURT OF SH GURVINDER PAL SINGH,
DISTRICT JUDGE (COMMERCIAL COURT)-02,
PATIALA HOUSE COURT, NEW DELHI
OMP (Comm.) No. 23/2022
M/S MUBARAK OVERSEAS PRIVATE LIMITED
REGISTERED OFFICE:
5181-A, LAHORI GATE,
NAYA BAZAR,
DELHI-110006
Email:[email protected]
Mob: 9811569090 ...Petitioner
versus
UNION OF INDIA & OTHERS
THROUGH:
i. THE ADDITIONAL SECRETARY
MINISTRY OF DEFENCE
GOVERNMENT OF INDIA
ROOM NO. 101-A, SOUTH BLOCK,
NEW DELHI-110001
ii. THE CHIEF DIRECTOR OF PURCHASE
ARMY PURCHASE ORGANIZATION (APO)
IHQ (ARMY), MINISTRY OF DEFENCE,
GOVERNMENT OF INDIA
ROOM NO. 318, "C" WING, SENA BHAWAN,
NEW DELHI-110001
EMAIL: [email protected]
iii. THE QUARTER MASTER COUNCIL (CFA)
ARMY HEAD QUARTER
SENA BHAWAN
NEW DELHI-110011 ...Respondents
Date of Institution : 27/01/2022
Arguments concluded on : 26/08/2022
Decided on : 28/09/2022
Appearances : Sh. Gaurav Aggarwal, Ld. Counsel for petitioner.
Sh. Ram Kawar, Ld. Counsel for respondents.
OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 1 of 38
JUDGMENT
1. Petitioner had filed the present petition under Section 34 of The Arbitration and Conciliation Act, 1996 (herein after referred as The Act), seeking setting aside of the impugned arbitral award dated 31/12/2021 of Ld. Sole Arbitrator Dr. Padmini Singh passed in Case No. PS1F/2020 titled 'M/s Mubarak Overseas Pvt. Ltd. vs Union of India (APO)'; and it also contains the prayer for allowing claim of petitioner and to dismiss the counter claim of respondents. Ld. Sole Arbitrator rejected the claim nos.
(i) and (ii) of claimant/petitioner whereas rest of the claim nos.
(iii) to (viii) were not pressed by claimant/petitioner. Ld. Sole Arbitrator also held respondents entitled to pre-estimated damages in the form of bank guarantee for an amount of Rs.8,47,980/- and also held respondents entitled to forfeit the bank guarantee. Ld. Sole Arbitrator also held respondents entitled to their counter claim nos. (i) and (ii).
2. Following are the claims of the claimant/petitioner made in the prayer of statement of claim before Ld. Sole Arbitrator:-
"i. The respondent are liable to return the total amount contained in those Bank Guarantees as afore-quoted, provided by the Claimant and 1% of the same for its renewal every year from the date of its furnishing.
ii. To pay interest on the amount of Bank Guarantee @ 18% per annum from the date it was furnished till its realization. Had the same amount of Bank Guarantee been invested by the claimant in some other business / tender, he would have earned much more than the interest that would have accrued on the total amount of the bank guarantee, but the claimant has restricted its claim to the interest only, had the amount of bank guarantee been returned to the claimant and the amount of the same would have been kept in the saving bank account or FDRs for taking the interest. So, the respondent is liable to pay the interest to the claimant.OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 2 of 38
iii. The respondents are also liable to pay cost of Bardana to the tune of Rs.1,41,600/- and sortex charges to the tune of Rs. 1,94,900/-.
iv. The respondents are also liable to pay brokerage charges @ 1%. The brokerage was paid for obtaining the goods and selling the same after the goods were rejected.
v. To pay a total loss of Rs.5,42,950/-as the claimant purchased the rice at Rs. 35,500/- per MT from the open market, but the same was sold in the market at the price of Rs.32,000/- per MT after its being rejected by the respondents, so, consequently, the claimant suffered a total loss of Rs. 5,42,950/-.
vi. To pay NeML charges to the tune of Rs.50,030,82/- Inclusive
of taxes
vii. To pay Freight charges:-
Sl. No. Name of the Station Charges (Rs.)
From To
1. Allahabad Delhi 3,90,000/-
viii. To pay GST refund claim to the tune of Rs 4,03,800/-
ix. Cost of Litigation:- Rs.2,00,000/-."
3. Following are the counter claims of the respondents before Ld. Sole Arbitrator:-
"14. Claim No.1 i. The claimant is bound to make good the financial loss caused and damages suffered by the Respondents which is detailed as under:-
AT no Value of the Damages suffered @
contract 0.5% per week or part
thereof not exceeding
undelivered goods
62501/Q/1(15)AT/2017- Rs.84,79,800/- Rs.8,47,980/-
18/Rice(NeML)/2017/
APO dt 28.07.2017
OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 3 of 38
Counter Claim No.2
ii. Grant interest on the counter claim @ 18% from
the stipulated date of delivery (31.08.2017) till the date of realization.
Counter Claim no.3 iii. Cost of Arbitration and Litigation expenses of Rs.
1,00,000/-."
4. I have heard Sh. Gaurav Aggarwal, Ld. Counsel for petitioner; Sh. Ram Kawar, Ld. Counsel for respondents and perused the record of the case, the arbitral proceedings record, relied upon precedents, filed brief written arguments on behalf of petitioner as well as on behalf of respondents and given my thoughtful consideration to the rival contentions put forth.
5. Adumbrated in brief following are the relevant facts of the case of parties. Tender No. 62501/Q/1/RFP/2017-18/NeML (Rice)/2017/APO dated 13 June 2017 was floated for procurement of 16900 MT Rice (Sharbati or Equivalent) on NeML portal through reverse auctioning. In the reverse auctioning process vendors bid their price on real time basis in a competitive manner on the platform of National e-Marketing Ltd. The prices offered by the vendors are visible on the website which prompt the vendors to offer the best price to the purchaser. A corrigendum was issued on 10/07/2017 of the RFP dated 13/06/2017 and was published on NeML portal. A contract with AT No. 62501/Q/1(15)AT/2017-18/Rice(NeML)/2017/APO dt 28 Jul 2017 was awarded to the petitioner for supply of 200 MT of Rice (Sharbati or Equivalent) @ Rs. 42,399/- Per MT out of OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 4 of 38 16900 MT Rice for which RFP was floated. Petitioner furnished an unconditional bank guarantee of Rs.8,47,980/- and as per the terms and conditions of the contract the same would be forfeited in case of any breach of contract in terms of clause No. 1.7 of Part-IV (A) of RFP. The stipulated delivery schedule was from 01/08/2017 to 30/08/2017 and auto extended delivery period was 31/08/2017 to 29/09/2017. Petitioner was required to supply the contracted quantity as per DFC No. 168 of 2017. During the delivery period the petitioner tendered Rice (Sharbati or Equivalent) which the respondents got checked by Central Food Laboratory (in short CFL) and CFL gave the report of rejection with the mention that as the specifications length/breadth ratio of the rice should not be below 4.0 as per clause 7 of Defence Food Specifications-2017 No. 168 whereas the reason for rejection was that such length/breadth ratio of tendered Rice was below the specification limit.
6. Following are the relevant material facts of the case of petitioner. The petitioner supplied entire supply of 200 MT of rice at Allahabad. However, only from the Counter Claim filed by the respondent before the earlier Ld. Sole Arbitrator annexed a copy of verdict dated 31/08/2017 (whereby it was shown to be rejected as the rice supplied was not as per specification). However, no such letter was ever given to the petitioner nor any reasons for rejection were communicated to the petitioner nor any message was sent for rejection. Hence, the petitioner was deprived for filing the appeal. Moreover, the reasons for rejection were not disclosed. So, on both counts, the petitioner was precluded from availing of its remedy of filing of the appeal.
OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 5 of 38The respondents did not file any report or disclose in their claim petition filed before the Ld. Arbitrator Mr. R.C. Kathia that they had ever communicated the reasons for rejection. It is settled law that reasons must be communicated. On 06/09/2017 petitioner also filed the report received by it from the Laboratory AGMARK, which found the material supplied was as per specifications and therein the size of the grain of the rice was given as follows:-
Length 6.55 /Breadth 1.59 Length / Breadth=4.1194 Petitioner filed petition under Section 9 of the Act bearing OMP (I)(COMM)No. 464/2017 seeking restrain order against the invocation of its bank guarantee(s)/FDR(s) by the respondent wherein Delhi High Court directed petitioner to keep the bank guarantee alive till the disposal of the arbitration proceedings before the Arbitrator and for a further period of one month thereafter. Petitioner thereafter filed petition under Section 11 of the Act bearing ARB.P. No. 100/2018 for appointment of an independent Sole Arbitrator. Respondent made statement before Delhi High Court in said case of having already appointed Sole Arbitrator in accordance with the agreement between the parties. Consequently said petition was disposed off. Ld. Arbitrator so appointed by respondents initially could not decide the matter, so petitioner having left with no alternative, approached Delhi High Court under Sections 14 and 15 read with Section 29 of the Act seeking for the termination of the Arbitrator. Said petition was dismissed by Delhi High Court and Special Leave Petition was filed against said order before Supreme Court. During pendency of the above said Special Leave Petition; respondents appointed OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 6 of 38 present Ld. Sole Arbitrator to which petitioner gave consent before Supreme Court. Arbitral proceedings culminated in impugned arbitral award.
7. Petitioner has impugned the arbitral award mainly on the following grounds. Impugned award suffers from patent illegality which goes to the very root of the matter. Damages are required to be proved by the party who suffers it. The loss must be proved by the party by leading evidence in order to claim damages. In the case in hand, admittedly respondent did not prove the damages and it is evident from the arbitral proceedings and award. In order of Ld. Sole Arbitrator dated 18/01/2021 it is recorded that both parties did not lead any evidence. In absence of evidence, damages cannot be granted. Ld. Sole Arbitrator completely ignored all the written submissions of claimant/ petitioner and relied precedents, which unequivocally and unambiguously state that the "damages must be proved and its proof cannot be dispensed with". The pre-estimated liquidated damages can only be granted in those cases where it is impossible to assess the compensation or in other words in case of breach of some contract, it may be impossible for the Court to assess compensation, the same can be calculated in accordance with established rules and the sum named must be awarded as a genuine pre-estimated damages but where losses can be ascertained in terms of money, the party claiming compensation must prove the losses suffered by it. Ld. Counsel for petitioner for that fact of the matter relied upon the cases of (i) Fateh Chand vs Bal Kishan Dass, AIR 1963 SC 1405; (ii) Maula Bux vs Union of India, 1969 (2) SCC 554; (iii) Essban Paints Pvt.
OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 7 of 38Ltd. vs Union of India & Anr., 2001 SCC OnLine Del 565; (iv) Union of India vs Rampur Distillery & Chemical Co. Ltd., (1973) 1 CSC 649; (v) M/s.Variety Body Builders a partnership firm at Baroda vs The Union of India, AIR 1973 Guj 256; (vi) State of Rajasthan vs Chandra Mohan Chopra, AIR 1971 Rajasthan 229; (vii) Bhai Panna Singh & Ors. Vs Bhai Arjan Singh & Ors., AIR 1929 Privy Council 179; (viii) State of U.P. vs Chandra Gupta & Co., 1976 SCC OnLine All 159; (ix) State of Kerala & Ors. vs United Shippers & Dredgers Ltd., 1982 SCC OnLine Ker 112;(x) M/s. Haryana Telecom Ltd. vs Union of India & Anr., ILR (2006) I Delhi 1074; (xi) Kailash Nath Associates vs Delhi Development Authority & Anr., (2015) 4 SCC 136. The findings given by Ld. Sole Arbitrator by awarding damages as claimed in Clause 1 and 2 of the Counter Claim, on the face of it are perverse because the same was awarded on the basis of "no evidence" as no evidence was led in support of claiming those damages. Same were claimed and awarded in an arbitrary and irrational manner. Ld. Counsel for petitioner relied upon the case of PSA Sical Terminals Pvt. Ltd. vs Board of Trustees of V.O. Chidambranar Port Trust Tuticorn & Ors, 2021 SCC OnLine SC 508 and argued that if a decision is arrived at on the basis of no evidence or evidence is thoroughly unreliable and no reasonable man would act upon it; then the award/orders will be perverse and the same is liable to be set aside. Ld. Counsel for petitioner argued that Ld. Sole Arbitrator has committed patent illegality in not considering the law laid in the case of Kailash Nath Associates vs Delhi Development Authority & Anr. (supra) in true perspective but had only picked few sentences from the said judgment and left the relevant OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 8 of 38 portion of the judgment which was relevant for the purpose of deciding the whole matter in controversy. Ld. Counsel for petitioner argued that Supreme Court in the case of Commissioner of Central Excise Delhi vs Allied Air- Conditioning Corpn. (Regd.), (2006) 7 SCC 735 inter alia held that:-
"A judgment should be understood in the light of facts of the case and no more should be read into it than what it actually says. It is neither desirable nor permissible to pick out a word or a sentence from the judgment divorced from the context of the question under consideration and treat it to be complete law decided by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court."
Ld. Counsel for petitioner argued that the impugned award suffers from patent illegality as the same has been passed against the fundamental policies of Indian Law, which cover compliance with statutes and judicial precedents of adopting a judicial approach complying with natural justice. The impugned award has been passed, in the teeth of the settled proposition of law. The impugned award suffers from patent illegality besides being in the teeth of the fundamental policies of the Indian Law because the law is well settled that where there is a clause for extension of time, in that situation the time is no longer the essence of the contract and the vendee has to prove the damages which they have suffered due to late delivery. In case they do not prove it, they cannot claim it. In the present case, Clause no. 10 in the contract regarding delivery period embodied as follows:-
"10. DELIVERY PERIOD (DP) The time for and date of delivery of the store shall be the essence of contract and the delivery must be completed as per the given Delivery Period, which is tentatively 20th July 19th August, 2017. The details of DP and terms and conditions for extension of DP are as per para 5 of Part-II of this RFP. It may be noted that a sum equivalent to 0.5% of price of contracted quantity which the OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 9 of 38 contractor fails to deliver, for each week or part thereof will be imposed as liquidated damages for any supplies made after the original DP."
Ld. Counsel for petitioner argued that Ld. Sole Arbitrator awarded Counter Claim towards damages for loss suffered due to non supply of contracted rice @ 0.5% per week and thereof along with other claim, with interest, without the proof of loss given by the respondents. No evidence was led by the respondents in support of their Counter Claim to prove the damages and accordingly, in terms of law laid by Supreme Court in the case of Welspun Specialty Solutions Limited (Formerly Known As Remi Metals Gujarat Ltd.) vs Oil & Natural Gas Corporation Ltd., 2021 SCC OnLine SC 1053, the impugned award is liable to be set aside as it suffers from patent illegality apart from being in contravention to the fundamental policy of Indian Law since there was Clause 7 in the contract i.e., RFP, which speaks of extension of time; so, time was no longer the essence of contract and consequently, without proving the damages, late delivery charges cannot be granted. It was prayed in the petition and argued by Ld. Counsel for petitioner to set aside the impugned arbitral award relying upon the following other precedents:-
1. Ssangyong Engineering & Construction Company Limited vs National Highways Authority of India (NHAI), (2019) 15 SCC 131;
2. Associate Builders vs Delhi Development Authority, (2015) 3 SCC 49;
3. MMTC Limited vs Vedanta Limited, (2019) 4 SCC 163;
4. Oil & Natural Gas Corporation Limited vs Western GECO International Limited, (2014) 9 SCC 263;
5. Kuldeep Singh vs Commissioner of Police & Ors., (1999) 2 SCC 10;
6. Dyna Technology Private Limited vs Crompton Greaves Limited, (2019) 20 SCC 1;
7. Som Datt Builders Limited vs State of Kerala, (2009) 10 SCC 259;
OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 10 of 388. I-Pay Clearing Services Private Limited vs ICICI Bank Limited, 2022 SCC OnLine SC 4 and
9. MSK Projects India (JV) Limited vs State of Rajasthan & Anr., (2011) 10 SCC 573.
8. Despite opportunities no reply was filed by the respondents to the petition.
9. Ld. Counsel for the respondents filed written arguments and also argued orally. Following are the main contentions in arguments of respondents through Ld. Counsel. A well competent arbitrator Dr. Padmini Singh was appointed in the proceedings before Supreme Court to resolve the disputes between the parties. Aforesaid Sole Arbitrator with the consent of both the parties, gave full opportunities to the parties to present their case upto the satisfaction of the parties. Petitioner never objected the integrity, truthfulness, competence etc. of Ld. Arbitrator. Ld. Sole Arbitrator covered all the points raised by the parties, and passed a well reasoned, speaking award by applying mind to the pleadings and considering the evidence produced before Ld. Sole Arbitrator. Petitioner had not preferred any appeal against rejection of tendered quantity of Rice by CFL to ST 7/8, which is an Appellate authority. In terms of Clause 1.4 of Part IV(A) of RFP, the Performance Bank Guarantee can be forfeited by the buyer if there is any breach of contract. Further, as per para 1.7 of Part IV (A) of RFP, the buyer has right to forfeit, the PBG in full in case of any breach of contractual obligation by the seller. Respondent was to forfeit the PBG to recover the damages for non supply of contracted quantity of rice. However, the petitioner moved Delhi High Court for stay on forfeiture of performance bank guarantee in terms of Section 9 of the Act and later for OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 11 of 38 appointment of Arbitrator under Section 11 of the Act. Delhi High Court granted stay on forfeiture of Bank Guarantee vide order dated 13/11/2017. Due to the breach of contract for non supply of contracted quantity as per specification, the contract was cancelled on 02/11/2018. Respondent had suffered damages due to non supply of contracted rice which was required for Armed Forces of India. Government had invested a lot of time and money in the process of bidding, formulating contract and subsequent process for the procurement of ration to the Armed Forces. Due to non supply of the material by the petitioner, the whole process of procurement was disrupted. This had caused damages to the respondent which cannot be quantified. On account of the breach of contract the claimant had suffered damages in terms of Clause 7 of Part III of RFP which reads as under:-
"7. Liquidated Damages. The Contract can be cancelled unilaterally by the Buyer in case items are not delivered within the actual contracted delivery period or within the Delivery Period (DP) indicated in the AT Notes. In the event of the Seller's failure to supply the items in the original delivery period, an auto extension of delivery period equal to the original delivery period will commence from the very next day of the last date of expiry of original DP. It may be noted that a sum equivalent to 0.5% of the price of contracted quantity which the contractor has failed to deliver, for each week or part thereof will be imposed as liquidated damages for the period the supplies are delayed after the completion of the original DP. The total damages shall not exceed value of 10% of undelivered goods."
The provision of liquidated damages was in the nature of pre-estimated damages which can be equivalent to 10% of the undelivered goods as under:-
AT No. Value of the Damages Value of PBG
contract suffered @ 0.5% required to be
per week or part forfeited for
thereof not breach of contract
exceeding due to non supply
OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 12 of 38
undelivered
goods
62501/Q/1(15) Rs.84,79,800/- Rs. 8,47,980/- Rs. 8,47,980/-
AT/2017-
18/Rice(NeML)/
2017/APO
Since the provision of forfeiture of bank guarantee was in the nature of recovery of pre-estimated damages; it is clear that respondent had suffered damages which were known to the petitioner at the time of breach of the contract. By the act of fraud by the petitioner, the respondent suffered damages which were recovered as pre-estimated damages by forfeiting the unconditional bank guarantees submitted by petitioner for due performance of the contract. The encashment of unconditional bank guarantee was done as per Clause 1.7 of Part IV (A) of RFP and the same would be forfeited in case of any breach of contract. A pre-estimated damage was enshrined in the contract which was equivalent to the forfeited value of the Bank Guarantee which was also 10% of the contract value. The supply was required for troops in the border areas. Due to non supply of contracted quantity the respondent had to incur loss which cannot be collated and quantified. To conclude the said contract the Government had to gear up the Government machinery. In the process senior Army Officers and Bureaucrats had finalized the contract after many rounds of meetings spread across many weeks. The Government had therefore invested lot of time and resources to conclude the said contract. Due to fraud on the part of the claimant this whole exercise had gone waste thereby affecting the operational efficiency and morale of the troops. Government had suffered damages due to fraud by the OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 13 of 38 petitioner/claimant which could not be quantified and collated. Therefore the damages were recovered from the PBG which were already pre-estimated under the clause "Liquidated Damages". Ld. Counsel for respondents relied upon the following precedents:-
1. India Tourism & Development Corporation Ltd. vs T.P. Sharma, 2002 (64) DRJ 423;
2. M.C. Katosh vs Union of India & Ors., 2005 (79) DRJ 365;
3. U.P. State Electricity Board vs Searsole Chemicals Ltd., (2001) 3 SCC 397;
4. Indu Engineering & Textiles Ltd. vs Delhi Development Authority, (2001) 5 SCC 691;
5. Municipal Corporation of Delhi vs Jagan Nath Ashok Kumar & Ors., MANU/SC/0013/1987;
6. Delhi Airport Metro Express Private Limited vs Delhi Metro Rail Corporation Limited, (2022) 1 SCC 131;
7. Ministry of Defence, Government of India vs CENREX SP. Z.O.O. & Ors., 2016 (1) Arb. LR 81 (Delhi);
8. G. Ramachandra Reddy & Company vs Union of India & Anr., (2009) 6 SCC 414;
9. Patel Engineering Limited vs North Eastern Electric Power Corporation Limited, (2020) 7 SCC 167;
10. Parsa Kente Collieries Limited vs Rajasthan Rajya Vidyut Utpadan Nigam Limited, (2019) 7 SCC 236;
11. Punjab State Civil Supplies Corporation Ltd. & Anr. vs Ramesh Kumar & Company & Ors., AIR 2021 SC 5758;
12. Indian Oil Corporation Ltd. vs Indian Carbon Ltd., AIR 1988 SC 1340;
13. Gujarat Water Supply & Sewage Board vs Unique Erectors (Gujarat) (P) Ltd., AIR 1989 SC 973 and
14. Rangammal vs Kuppuswami & Anr., (2011) 12 SCC 220.
Ld. Counsel for respondents argued that Supreme Court in the case of Mitra Guha Builders (India) Company vs Oil & Natural Gas Corporation Limited, (2020) 3 SCC 222 inter alia held that:-
"By the terms of the agreement, the parties have consciously agreed that in case the contractor fails to comply with the conditions and complete the work with due diligence, the Superintending Engineer may decide the compensation in terms of Cause 2 of the agreement."OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 14 of 38
Ld. Counsel for respondents argued that Supreme Court in the case of Oil & Natural Gas Corporation Ltd. vs SAW Pipes Ltd., 2003 (5) SCC 705 inter alia held that:-
"B. (1) The impugned award requires to be set aside mainly on the grounds:-
(i) there is specific stipulation in the agreement that the time and date of delivery of the goods was the essence of the contract;
(ii) in case of failure to deliver the goods within the period fixed for such delivery in the schedule, ONGC was entitled to recover from the contractor liquidated damages as agreed;
(iii) it was also explicitly understood that the agreed liquidated damages were genuine pre-estimate of damages;
(iv) on the request of the respondent to extend the time limit for supply of goods, ONGC informed specifically that time was extended but stipulated liquidated damages as agreed would be recovered;
(v) liquidated damages for delay in supply of goods were to be recovered by paying authorities from the bills for payment of cost of material supplied by the contractor;
(vi) there is nothing on record to suggest that stipulation for recovering liquidated damages was by way of penalty or that the said sum was in any way unreasonable.
(vii) In certain contracts, it is impossible to assess the damages or prove the same. Such situation is taken care by Sections 73 and 74 of the Contract Act and in the present case by specific terms of the contract."
Ld. Counsel for respondents argued that the above said principle was reiterated by Supreme Court in the case of Construction & Design Services vs Delhi Development Authority, (2015) 14 SCC 263. Ld. Counsel for respondents OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 15 of 38 argued that by the present petition/objections the petitioner seeks re-appraisal of the matter as if it is an appeal, which is liable to be dismissed and it is not the case wherein the petitioner has been able to define that the award is against any public policy or against the terms of the contract. Ld. Counsel for respondent prayed and argued for dismissal of the petition.
10. An arbitral award can be set aside on the grounds set out in Section 34 (2) (a), Section 34 (2) (b) and Section 34 (2A) of the Act in view of Section 5 of the Act and if an application for setting aside such award is made by party not later than 3 months from the date from which the party making such application had received the signed copy of the arbitral award or if a request had been made under Section 33 of the Act, from the date on which that request had been disposed of by the Arbitral Tribunal. If the Court is satisfied that the applicant was prevented by sufficient cause from the making the application within the said period of three months it may entertain the application within further period of 30 days, but not thereafter.
11. Section 34 (1) (2), (2A) and (3) of The Arbitration and Conciliation Act, 1996 read as under:-
"34. Application for setting aside arbitral award- (1) Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub- section (3).
(2) An arbitral award may be set aside by the court only if-
(a) the party making the application furnishes proof that-
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 16 of 38 thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration;
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or
(b) the court finds that-
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation 1 - For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,-- (i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.
Explanation 2.-- For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.
OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 17 of 38(2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:
Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.
(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:
Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter."
12. Supreme Court in case of Associate Builders vs. Delhi Development Authority (supra) has held that the interference with an arbitral award is permissible only when the findings of the arbitrator are arbitrary, capricious or perverse or when conscience of the Court is shocked or when illegality is not trivial but goes to the root of the matter. It is held that once it is found that the arbitrator's approach is neither arbitrary nor capricious, no interference is called for on facts. The arbitrator is ultimately a master of the quantity and quality of evidence while drawing the arbitral award. Patent illegality must go to the root of the matter and cannot be of trivial nature.
Also was held therein that:
"33. "...when a court is applying the 'public policy' test to an arbitration award, it does not act as a court of appeal and consequently errors of fact cannot be corrected. A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award....
Once it is found that the arbitrators approach is not arbitrary or capricious, then he is the last word on facts.."
OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 18 of 3813. Supreme Court in case of Ssangyong Engineering & Construction Co. Ltd. vs. National Highways Authority of India (supra) has held that under Section 34 (2A) of the Act, a decision which is perverse while no longer being a ground for challenge under "public policy of India", would certainly amount to a patent illegality appearing on the face of the award. A finding based on the documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties and therefore would also have to be characterized as perverse. It is held that a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality.
14. Following are the relevant Clauses in the Request For Proposal (in short RFP) of Army Purchase Organization with respect to invitation of online bids for the contract in question applicable to parties to arbitration and this case:-
"PART-I: GENERAL INFORMATION ...........................................................................................................
10. Delivery Period (DP). The time for and date of delivery of the store shall be the essence of the contract and the delivery must be completed as per the given delivery period which is tentatively 20 July to 19 August, 2017. The details of DP and terms & conditions for extension of DP are as per Para 5 of Part-II of this RFP. It may be noted that a sum equivalent to 0.5% of the price of contracted quantity which the contractor has failed to deliver, for each week or part thereof will be imposed as liquidated damages for any supplies made after the original DP. ..........................................................................................
PART-III : STANDARD CONDITIONS OF RFP ..........................................................................................OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 19 of 38
7. Liquidated Damages. The Contract can be cancelled unilaterally by the Buyer in case items are not delivered within the actual contracted delivery period or within the Delivery Period (DP) indicated in the AT Notes. In the event of the Seller's failure to supply the items in the original delivery period, an auto extension of delivery period equal to the original delivery period will commence from the very next day of the last date of expiry of original DP. It may be noted that a sum equivalent to 0.5% of the price of contracted quantity which the contractor has failed to deliver, for each week or part thereof will be imposed as liquidated damages for the period the supplies are delayed after the completion of the original DP. The total damages shall not exceed value of 10% of undelivered goods.
15. Following are the issues framed by Ld. Sole Arbitrator:-
"1. Whether any breach of contract was committed and if so, then whether the breach of contract was committed by claimant or respondent. OPC and OPR
2. Whether respondent was justified in terminating the contract. OPR
3. Whether the claimant is entitled for the claims made in their statement of claim and if so, then to what extent. OPC
4. Whether the Respondent is entitled for the claim in their counter claims as claimed by them and if so, then to what extent. OPR
5. Whether forfeiture of Bank Guarantee by the respondent was justified in terms of the contract. OPR
6. Whether respondent is entitled to recover damages from forfeited Bank Guarantee deposited by the claimant. OPR
7. Whether the claimant is entitled to recover damages as claimed by them in their statement of claim. OPC
8. Whether the Respondent is liable to refund the amount of performance bank guarantee deposited by the Claimant. OPC
9. If the respondent is liable to refund the amount of performance Bank Guarantee, then whether the respondent is also liable to pay interest on it? If so, at what rate? OPC
10. Relief."OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 20 of 38
16. Claim nos. (iii) to (viii) were not pressed by Petitioner Claimant before Ld. Sole Arbitrator whereas Ld. Sole Arbitrator had rejected the claim no. (i) and (ii) of the claimant/petitioner as well as held respondents entitled to their counter claim no. (i) and
(ii); for which, findings of Ld. Sole Arbitrator, issue-wise are as follows:-
"My issue-wise findings are as under:
1. Whether any breach of contract was committed and if so, then whether the breach of contract was committed by claimant or respondent. OPC and OPR In view of above finding the Claimant committed breach of contract by not supplying 200 MT of Rice (Sharbati or Equivalent) as per the DFS Specification No. 168 in terms of the contract. Hence, the Issue No. 1 is decided against the Claimant and in favour of the Respondent.
2. Whether respondent was justified in terminating the contract. OPR In view of the above finding the termination of contract by the respondents was justified, hence the issue no. 2 is decided in favour of the respondent.
3. Whether the claimant is entitled for the claims made in their statement of claim and if so, then to what extent.
OPC In view of the above finding the claimant has committed the breach of contract, the issue no 3 is decided against the Claimant, claimant is not entitled to the claim made in their statement of claim.
4. Whether the Respondent is entitled for the claim in their counter claims as claimed by them and if so, then to what extent. OPR In view of the above finding, the issue no 4 is decided in favour of the Respondent. They are entitled to claim No1, i.e., forfeiture of BG for an amount of Rs. 8,47,980/- in the form of pre-estimated damages. So far as claim no. 2 is concerned they are entitled to interest @ 9% from the date of termination of contract till the date of realisation. So far as claim no. 3 is concerned, parties are liable to bear their own cost of Arbitration and litigation expenses.
OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 21 of 385. Whether forfeiture of Bank Guarantee by the respondent was justified in terms of the contract. OPR In this case during the course of proceedings, it is revealed that the Bank Guarantee could not be forfeited due to the stay of Hon'ble High Court of Delhi. In view of the finding that the claimant has committed breach of contract it is held that Respondent is entitled to forfeiture of the Bank Guarantee as per the terms of the contract hence, Issue no. 5 is decided in favour of Respondent.
6. Whether respondent is entitled to recover damages from forfeited Bank Guarantee deposited by the claimant. OPR The Respondent did not produce any additional evidence/material to prove further damage suffered by the Respondent by non-supply. Hence, Issue No. 6 is decided against the Respondent.
7. Whether the claimant is entitled to recover damages as claimed by them in their statement of claim. OPC The Claimant did not produce any evidence/material to prove further damage suffered by the Claimant by termination of contract. Hence, Issue No. 7 is decided against the Claimant.
8. Whether the Respondent is liable to refund the amount of performance bank guarantee deposited by the Claimant. OPC In view of the above finding regarding breach of contract by the Claimant, the Respondent is not liable to refund the amount of BG to the Claimant. The Issue no. 8 is decided in favour of the Respondent.
9. If the respondent is liable to refund the amount of performance Bank Guarantee, then whether the respondent is also liable to pay interest on it? If so, at what rate? OPC In view of the above finding regarding breach of contract by the Claimant, the Respondent is not liable to refund the amount of BG to the Claimant. The issue is decided in favour of the Respondent.
10. Relief No additional Relief is granted."
OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 22 of 3817. Following is the letter dated 02/11/2018 of respondents to petitioner for termination of the contract in question:-
TERMINATION NOTICE BY SPEED POST 62501/Q/1(15)/AT/2017-18/Rice(NeML)/2017/APO IHQ of MoD (Army), QMG's Branch Army Purchase of Organisation Krishi Bhawan, New Delhi Dated: 02 Nov 2018 To M/s Mubarak Overseas Ltd, 5181A, Lahori Gate, Naya Bazar, Delhi-110006 (Email Id : [email protected]) Subject:- TERMINATION OF CONTRACT FOR 200 MT RICE (SHARBATI OR EQUIVALENT) Sir,
1. Please refer the following:-
(a) AT Note 62501/Q/1(15)AT/2017-18/Rice(NeML)/ 2017/APO dated 28.07.2017.
(b) RFP No.62501/Q/1/RFP/2017-18/NeML(Rice)/ 2017/APO dated 13.06.2017 and corrigendum dated 10.07.2017.
(c) Hon'ble High Court of Delhi order in O.M.P(I) (COMM.) 464/2017 dt 22 Mar 2018.
2. Please note that the auto extended delivery period stipulated in the subject contract has expired on 29.09.2017.
3. As per terms and conditions of the contract, you were required to supply 200 MT Rice (Sharbati and Equivalent) as per DFS No. 168 at Supply Depot ASC, Allahabad. However you failed to supply qty 200 MT Rice out of 200 MT within original DP and auto extended DP.
4. In view of the above, the contract is hereby terminated in respect of unsupplied quantity i.e. 200 MT RICE (SHARBATI OR EQUIVALENT) not delivered as per terms and conditions of the contract, by taking dt 30.09.2017 as Date of Breach in exercise of the rights under the terms of contract governing the supply of rice (Sharbati or equivalent). The BG No-3101417BG0000010 dated 03 Aug 2017 for amount Rs 8,47,980/- (Rupees Eight Lakhs OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 23 of 38 Forty Seven Thousand Nine Hundred Eighty only) furnished by you towards the said contract will be dealt as per the final decision of arbitrator. Till such time the final verdict on the subject case is given by the arbitrator the PBG is required to be kept alive by you in compliance with the Honourable Delhi High Court Order dated 13 November 2017 and 22 March 2018. A confirmation to this effect and periodic extension of the PBG as & when due may please be forwarded to us through the bank to avoid contempt of Court."
5. This is without prejudice to the rights and remedies available to the Government under the terms and conditions of contract and any other rights which are hereby fully reserved.
6. This has concurrence of IFA UO No. 9700/IFA(A- Q)/APO/4314/381 dated 01 Nov 2018.
7. This letter is issued on the approval and direction of the competent authority.
8. Please acknowledge receipt.
Yours faithfully, Sd/-
(Sapan Zenet) Lt Col Addl Offr (APO) For on behalf of the President of India Copy to:-
1. DGST (ST-3/4), & (ST-7/8) QMG's Branch, IHQ of MoD (Army).
2. PCDA,'G' Block, New Delhi (Thr. Spl. Diary).
3. CFL Delhi, Mumbai..
4. IFA (Army-Q), Sena Bhawan, New Delhi.
5. NeML by e-mail.
6. Supply Depot ASC, Allahabad.
7. The Chief Manager, State Bank of India Khari Baoli"
18. Above said letter of termination of contract finds only mention of non supply of contracted quantity of goods by the petitioner/contractor to respondent/borrower and it does not stipulate of any rejection of supplied goods by petitioner/ contractor to respondent/borrower during delivery period on the basis of rejection report of CFL for length/breadth ratio of the rice/goods to be below specifications. It is also fact of the matter OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 24 of 38 that before Ld. Sole Arbitrator the borrower/respondent had not placed on record any proof of service of copy of Central Food Laboratory Report for rejection of supply of goods/rice by petitioner/contractor/claimant to respondent/borrower during delivery period.
19. Supreme Court in the case of Maula Bux vs Union of India (supra) inter alia held that:-
"...the expression "whether or not actual damage or loss is proved to have been caused thereby" is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation the sum named by the parties if it be regarded as a genuine pre- estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him."
20. Delhi High Court in the case of Essban Paints Pvt. Ltd. vs Union of India & Anr. (supra) inter alia that in case the contract was not performed and there was breach thereof by the petitioner, it was for the respondent to prove the loss suffered because of such breach and to forfeit the security only to the extent of loss.
21. Supreme Court in the case of MMTC Ltd. vs Vedanta Ltd. (supra) inter alia held that as per the proviso to Section 34 (2A) of the Act, an award shall not be set aside merely on the ground of an erroneous application of the law or by appreciation of evidence.
22. Supreme Court in the case of PSA Sical Terminals Pvt. Ltd. vs Board of Trustees of V.O. Chidambranar Port Trust OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 25 of 38 Tuticorn & Ors. (supra) inter alia held that:-
"45. To understand the test of perversity, it will also be appropriate to refer to paragraph 31 and 32 from the judgment of this Court in Associate Builders (supra), which read thus:
31. The third juristic principle is that a decision which is perverse or so irrational that no reasonable person would have arrived at the same is important and requires some degree of explanation. It is settled law that where:
(i) a finding is based on no evidence, or
(ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or
(iii) ignores vital evidence in arriving at its decision, such decision would necessarily be perverse.
32. A good working test of perversity is contained in two judgments. In Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons [1992 Supp (2) SCC 312], it was held: (SCC p. 317, para 7) "7. ... It is, no doubt, true that if a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then, the finding is rendered infirm in law."
In Kuldeep Singh v. Commr. of Police [(1999) 2 SCC 10: 1999 SCC (L&S) 429], it was held: (SCC p. 14, para 10) "10. A broad distinction has, therefore, to be maintained between the decisions which are perverse and those which are not. If a decision is arrived at on no evidence or evidence which is thoroughly unreliable and no reasonable person would act upon it, the order would be perverse. But if there is some evidence on record which is acceptable and which could be relied upon, howsoever compendious it may be, the conclusions would not be treated as perverse and the findings would not be interfered with."
23. Supreme Court in the case of Dyna Technologies Pvt. Ltd. vs Crompton Greaves Ltd.(supra) inter alia held that arbitral OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 26 of 38 award is to be set aside on the grounds of insufficiency and inadequacy of reasoning being unintelligible and therefore unsustainable.
24. In the case of M/s Tamilnadu Telecommunication Ltd vs Bharat Sanchar Nigam Ltd., OMP (Comm.) 430/16, decided by Delhi High Court on 11/11/2016, in para 17, following pronouncements of the case of Oil & Natural Gas Corporation Ltd. Vs Saw Pipes Ltd. (supra) were elicited:
64. ....Under Section 73, when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss caused to him which parties knew when they made the contract to be likely to result from the breach of it. This Section is to be read with Section 74, which deals with penalty stipulated in the contract, inter alia (relevant for the present case) provides that when a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, the party complaining of breach is entitled, whether or not actual loss is proved to have been caused, thereby to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named. Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach. Therefore, the emphasis is on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him.....
67.....In our view, in such a contract, it would be difficult to prove exact loss or damage which the parties suffer because of the breach thereof. In such a situation, if the parties have pre-
estimated such loss after clear understanding, it would be totally unjustified to arrive at the conclusion that party who has committed breach of the contract is not liable to pay compensation. It would be against the specific provisions of Section 73 and 74 of the Indian Contract Act. There was nothing on record that compensation contemplated by the OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 27 of 38 parties was in any way unreasonable. It has been specifically mentioned that it was an agreed genuine pre-estimate of damages duly agreed by the parties. It was also mentioned that the liquidated damages are not by way of penalty. It was also provided in the contract that such damages are to be recovered by the purchaser from the bills for payment of the cost of material submitted by the contractor. No evidence is led by the claimant to establish that stipulated condition was by way of penalty or the compensation contemplated was, in any way, unreasonable. There was no reason for the tribunal not to rely upon the clear and unambiguous terms of agreement stipulating pre-estimate damages because of delay in supply of goods ......"
25. Supreme Court in the case of Delhi Airport Metro Express Pvt. Ltd. vs Delhi Metro Rail Corporation Ltd. (supra) held that :-
"29. Patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal would not fall within the expression 'patent illegality'. Likewise, erroneous application of law cannot be categorised as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression 'patent illegality'. What is prohibited is for courts to re-appreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award, as courts do not sit in appeal against the arbitral award. The permissible grounds for interference with a domestic award under Section 34 (2-A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair-minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression 'patent illegality'.
26. In the case of Ministry of Defence, Govt. of India vs CENREX SP Z.O.O (supra), relying upon the law laid in the case of Oil & Natural Gas Corporation Ltd. Vs Saw Pipes Ltd., (2003) 5 SCC 705, it was inter alia held that once the nature of OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 28 of 38 contract is such that losses cannot be easily calculated, the amount claimed as liquidated damages can be claimed as per Section 74 of the Indian Contract Act, 1872 without proving and showing how much loss has been caused. The subject matter of the contract therein was supply of parachutes and was of the type where how much loss caused to the petitioner/Ministry of Defence, Government of India for delay for its supplies cannot be calculated because how the Army of this country would have been affected by non delivery of parachutes on time and what would have been the alternative arrangements made due to delay deliveries and expenses accordingly which had to be incurred on account of non availability of parachutes on time, was impossible to calculate.
27. Supreme Court in the case of Patel Engineering Ltd. vs North Eastern Electric Power Corporation Ltd. (supra) inter alia held that wherein the findings of Ld. Arbitrator are arrived at by taking into account irrelevant facts and by ignoring the vital clauses, the same suffers from the vice of irrationality and perversity and that the award will be liable to be set aside when while interpreting the terms of the contract, no reasonable person could have arrived at such a conclusion and the award passed by the arbitrator suffers from the vice of irrationality and perversity.
28. Supreme Court in the case of Construction & Design Services vs Delhi Development Authority (supra) inter alia held that loss could be assumed, even without proof and stipulated damages may be levied by way of penalty but entitlement to compensation is only to the extent of loss suffered.
OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 29 of 3829. Supreme Court in the case of Parsa Kente Collieries Limited Vs. Rajasthan Rajya Vidyut Utpadan Nigam Limited (supra) inter alia held that an Arbitral Tribunal must decide in accordance with the terms of the contract. If an arbitrator construes a term of the contract in a reasonable manner and if such interpretation is possible or plausible interpretation, award cannot be set aside. The construction of the terms of a contract is primarily for an arbitrator. The Court does not act as a court of appeal when a court is applying the "public policy" test to an arbitration award. It is held that if the arbitral award is contrary to the evidence on record, it can be set aside by the Court under Section 34 of the Act.
30. It is not the case of the present respondent buyer laid before the Arbitral Tribunal that due to nature of contract, losses cannot be easily calculated, so claimed liquidated damages as pre- estimated damages were to be awarded as per Section 73 of The Indian Contract Act, 1872; without proving and showing how much loss has been caused. It had been argument of Ld. Counsel for respondent/purchaser that due to non supply of contracted material/goods by the petitioner, the whole process of procurement was disrupted. The quality of rice which was required to be supplied to the Armed Forces could not be procured by the nodal agency i.e., APO. Thereafter local units had to procure alternate material/goods on adhoc basis across India in small quantities which was not the equivalent to the rice which the claimant/petitioner failed to supply and it had caused damages to the respondents/buyers which cannot be collated and quantified. The letter of termination of contract dated OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 30 of 38 02/11/2018, above elicited, does not contain averment of any of those facts above said, which have been argued, orally or in writing, by Ld. Counsel for respondents nor does that letter dated 02/11/2018 for termination of contract by buyer/respondents finds any mention of alternate quantity of supply/goods was procured by any local units of respondents/buyers and such procured quantity of supply/goods was not equivalent to the rice which petitioner/claimant failed to supply. Even respondent/ buyers did not plead before Ld. Sole Arbitrator in arbitral proceedings nor led any evidence to prove of having so procured any alternate quantity/quality of supply/rice in any manner, so as to qualify any risk purchase. No material was laid before Ld. Sole Arbitrator to also reflect as to what alternate purchase of the supplies/goods were done by the purchaser/respondents and the amount spent on it was in any manner in excess of the amount contracted by respondent/purchaser with the petitioner/ contractor/supplier, so as to put forth or lay any claim for suffering any loss due to non delivery of contracted goods by petitioner/claimant/contractor. Reliance of Ld. Counsel for respondents on the case of Ministry of Defence, Government of India vs CENREX SP. Z.O.O. & Ors. (supra) is misplaced; more so, when in the fact of the matter, quantification of loss for any alternate purchases done was possible, for the purchaser/ respondent.
31. In the case of Vishal Engineers & Builders vs Indian Oil Corporation Ltd., FAO (OS) 204 of 2010, decided by Delhi High Court on 30/11/2011, it was inter alia held that it was duty of the Court not to enforce penalty clause but only to award a OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 31 of 38 reasonable compensation, which had been held to be statutorily imposed upon Courts by Section 74 of the Contract Act and Court had to adjudge in every case, reasonable compensation for breach of contract having regard to conditions which existed on date of breach.
It was held therein that if there was absence of any loss, whatsoever, an aggrieved party could not claim that it was still entitled to liquidated damages without, at least, proving a semblance of loss.
32. Supreme Court in the case of Kailash Nath Associates vs Delhi Development Authority (supra) had elicited the law on compensation for breach of contract under Section 74 as follows:-
"43. On a conspectus of the above authorities, the law on compensation for breach of contract Under Section 74 can be stated to be as follows:
1. Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.
2. Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.
3. Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 32 of 38
4. The Section applies whether a person is a Plaintiff or a Defendant in a suit.
5. The sum spoken of may already be paid or be payable in future.
6. The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded.
7. Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application."
33. Delhi High Court in the case of United Telecoms Limited vs Mahanagar Telephone Nigam Limited, MANU/DE/ 0969/2012 inter alia held that it is well established that in a contract on its breach, penalty can be levied on the defaulting party only if the other party had suffered and the same is proved.
34. Precedents relied upon by Ld. Counsel for respondent/buyer are not applicable in the present case as they embody facts and circumstances entirely different and distinguishable to the facts and circumstances of case in hand.
35. True that in judicial intervention under Section 34 of the Act, this Court cannot re-appreciate the evidence nor can sit in appeal nor the findings of fact can be interfered on merits. Arbitral Tribunal in its findings, above elicited, had concluded on the premise of entitlement of respondents to recover liquidated damages considering them to be pre-estimated liquidated damages, without in any manner there being any iota of evidence on record of respondents/buyers having in fact spent any amount OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 33 of 38 in excess of contracted amount agreed in the contract with the petitioner/claimant/contractor for goods/supplies from alternate sources nor even the above elicited termination letter dated 02/11/2018 of the contract in question having any whisper for it. Before Arbitral Tribunal in any proceedings and in any pleadings of the parties to the arbitration, there was no oral or documentary evidence borne out for any loss suffered by respondents/buyers due to non supply of contracted goods, as per Defence Food Specifications after rejection of supplies/goods in terms of CFL report. Above elicited clause in RFP for liquidated damages was subject to maximum value of liquidated damages being not higher than 10% of the value of the delayed stores. It does not simplicitor enables the buyer/respondent to levy penalty or liquidated damages beyond reasonable compensation whereas reasonable compensation is only to the maximum of the quantum of loss suffered by buyer/contractor. Such reasonable compensation is to be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of The Contract Act. The elicited clauses in the contract and RFP stipulate levy of liquidated damages or penalty as 10% of the value of delayed stores, which is the upper limit and per se cannot be taken as genuine pre-estimate of damages in the case when it is not impossible for the respondents/buyers to calculate the loss suffered on account of non supply of contracted goods/supply by the supplier/claimant/petitioner in terms of the specifications for the goods or after rejection of supplied goods/ supplies by CFL on account of non compliance of Defence Food Specifications. In terms of law laid in the cases of (i) Fateh Chand vs Bal Kishan Dass (supra); (ii) Maula Bux vs Union of OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 34 of 38 India (supra); (iii) Essban Paints Pvt. Ltd. vs Union of India & Anr. (supra) (iv) Kailash Nath Associates vs Delhi Development Authority & Anr. (supra); the damage or loss caused to the buyers/respondents is sine qua non/pre-requisite for the award of reasonable compensation for damage or loss caused by breach of contract under Section 74 of The Contract Act.
36. It was possible for the respondents/buyers to prove in arbitral proceedings by evidence the loss suffered on risk purchase, for having in fact spent any amount in excess of contracted amount agreed in the contract with the petitioner/ claimant/contractor for goods/supplies procured from alternate sources after rejection of supplies/goods in terms of CFL report on account of non compliance of Defence Food Specifications. In terms of law laid in the case of Kailash Nath Associates vs Delhi Development Authority & Anr. (supra), Section 74 of The Contract Act will apply to cases of forfeiture of earnest money under a contract and only where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 of The Contract Act would have no application; and in present case no forfeiture has taken place under the terms and conditions of a public auction before agreement is reached. The impugned award of Ld. Sole Arbitrator resting on the premise of applicability of Section 73 of The Indian Contract Act, 1872, assuming damages suffered to be recoverable as pre-estimated damages; in the absence of any evidence of any loss suffered by respondent/buyer on account of alternate procurement of supplies/goods for non supply of contracted goods/supplies by petitioner/seller/claimant within the OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 35 of 38 delivery period after rejection report of CFL for goods supplied within the delivery period not being in terms of Defence Food Specifications; is perverse in law and contrary to well established legal principles, which formed the public policy of India.
37. In the fact of the matter, in view of foregoing discussions, the impugned award is liable to be set aside and is accordingly set aside.
38. Delhi High Court in case of Nussli Switzerland Ltd. v. Organizing Committee Commonwealth Games, 2014 SCC OnLine Del 4834 had inter alia held:-
34. A party like the Organizing Committee which has its claims rejected, except a part, but which subsumes into the larger amount awarded in favour of the opposite party, even if succeeds in the objections to the award would at best have the award set aside for the reason the Arbitration and Conciliation Act, 1996 as distinct from the power of the Court under the Arbitration Act, 1940, does not empower the Court to modify an award. If a claim which has been rejected by an Arbitral Tribunal is found to be faulty, the Court seized of the objections under Section 34 of the Arbitration and Conciliation Act, 1996 has to set aside the award and leave the matter at that. It would be open to the party concerned to commence fresh proceedings (including arbitration) and for this view one may for purposes of convenience refer to sub-Section (4) of Section 43 of the Arbitration and Conciliation Act, 1996. It reads: -
"43. Limitations-
(1) xxxxx (2) xxxxx (3) xxxxx (4) Where the Court orders that an arbitral award be set aside, the period between the commencement of the arbitration and the date of the order of the Court shall be excluded in computing the time prescribed by the Limitation Act, 1963, for the commencement of the proceedings (including arbitration) with respect to the dispute so submitted."
39. Aforesaid pronouncements of Delhi High Court in the case of Nussli Switzerland Ltd. v. Organizing Committee OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 36 of 38 Commonwealth Games (supra) found approval of Supreme Court in case of The Project Director, National Highways No. 45 E AND 220 National Highways Authority of India vs. M. Hakeem & Anr., Civil Appeal No. of 2021 [Arising out of SLP (Civil) No.13020 of 2020] decided on 20/07/2021.
40. Division Bench of Delhi High Court in the case of Mahanagar Telephone Nigam Limited vs Fujitshu India Private Limited, MANU/DE/0459/2015 inter alia appreciated the following law laid by Supreme Court in the case of McDermott International Inc. v. Burn Standard Co. Ltd. and Ors., MANU/ SC/8177/2006:(2006) 11 SCC 181 :-
"The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court's jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it."
41. Supreme Court in the case of Kinnari Mullick & Anr. vs Ghanshyam Das Damani, Civil Appeal No. 5172 of 2017 [Arising out of SLP (Civil) No. 2370 of 2015 decided on 20/04/2017 appreciated the legal position expounded in the case of McDermott International Inc. vs Burn Standard Ltd., (supra) wherein it was observed that parliament had not conferred any power of remand to the Court to remit the matter to the arbitral tribunal except to adjourn the proceedings as provided under sub-section (4) of Section 34 of the Act. It was also held therein that the limited discretion available to the Court OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 37 of 38 under Section 34(4) of the Act can be exercised only upon a written application made in that behalf by a party to the arbitration proceedings. It is crystal clear that the Court cannot exercise this limited power of deferring the proceedings before it suo moto.
42. Delhi High Court in the case of Steel Authority of India Limited vs Indian Council of Arbitration & Anr., LPA 103/2016 decided on 28/03/2016 placed reliance upon the decision of Supreme Court in the case of McDermott International Inc. vs Burn Standard Ltd. (supra), wherein it was held that once an award has been set aside, the parties would be free to begin the arbitration once again.
43. Accordingly, consequent to setting aside of the impugned Arbitral Award; parties to this lis have all their rights and remedies as available in law including under The Act including under Section 43 of The Act and may take recourse to appropriate remedies permissible in law.
44. The parties are left to bear their own costs.
45. File be consigned to record room.
Digitally signed by GURVINDER GURVINDER PAL
SINGH
PAL SINGH Date: 2022.09.28
13:19:00 +0530
ANNOUNCED IN (GURVINDER PAL SINGH)
OPEN COURT District Judge (Commercial Court)-02
th
On 28 September, 2022. Patiala House Court, New Delhi.
(DK) OMP (Comm.) No. 23/2022 M/S MUBARAK OVERSEAS PRIVATE LIMITED VS UNION OF INDIA & ORS. Page 38 of 38